In re Galesky

• Decision Date: 29 September 2021
• Docket Number: Case No. 20-25509-gmh
• Citation: 633 B.R. 574
• Parties: IN RE: Michael L GALESKY, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

633 B.R. 574

IN RE: Michael L GALESKY, Debtor.

Case No. 20-25509-gmh

United States Bankruptcy Court, E.D. Wisconsin.

Signed September 29, 2021

Bryan M. Becker, Esq., Dayten P. Hanson, Hanson & Payne, LLC, Milwaukee, WI, for Debtor.

Douglas F. Mann, Milwaukee, WI, Trustee, Pro Se.

Nicole I. Pellerin, Murphy Desmond, S.C., Madison, WI, Jane (Ginger) F. Zimmerman, Murphy Desmond S.C., Madison, WI, for Trustee.

DECISION AND ORDER ON TRUSTEE'S AND WISCTEX LLC'S OBJECTIONS TO DEBTOR'S CLAIM OF EXEMPTIONS

G. Michael Halfenger, Chief United States Bankruptcy Judge The chapter 7 trustee and WiscTex LLC, a creditor, objected to the debtor's claim of exemptions. The court held an evidentiary hearing. This decision and order sets forth the court's findings of fact and conclusions of law as required by Federal Rule of Civil Procedure 52 and Federal Rules of Bankruptcy Procedure 7052 and 9014.

I

The underlying facts are not genuinely disputed: The debtor is 50 years old. After graduating from high school, he served in the United States Army. For his service, he received a Commendation Medal, three Good Conduct Medals, an Achievement Medal, an Overseas Service Ribbon, and Superior Unit Awards for the Army and the Air Force; Top Secret and Sensitive Compartmented Information security clearances; and an honorable discharge due to a disability. He began receiving veterans’ disability benefits in 2000 (and Social Security disability benefits in 2020).

In 2008 the debtor started working for Johnson Creek Enterprises LLC. By 2011 he was the sole member of Therrons Dad LLC, which had acquired a minority interest (about 28%) in Johnson Creek Enterprises, though it sold part of that interest in 2011 and much of the remainder in 2014.

In 2012 the debtor and Therrons Dad executed a continuing unlimited guaranty of all debts of Johnson Creek Enterprises to JPMorgan Chase Bank. See ECF No. 111-10.¹ Johnson Creek Enterprises borrowed from JPMorgan Chase several times. Those loans were memorialized in notes for about $383 thousand in May 2012, $500 thousand in November 2013, and $500 thousand in July 2014.

In May 2016 the debtor was still working for Johnson Creek Enterprises, but he planned to quit, so he rolled over about $50 thousand in a Roth 401(k) sponsored by Johnson Creek Enterprises to a new self-directed Roth individual retirement account. That September the debtor resigned his employment with Johnson Creek Enterprises and generally ceased his involvement with the company, though Therrons Dad retained an interest in the company, and the debtor remained the sole member of Therrons Dad.

In June 2016 JPMorgan Chase sold its interests under and related to the May 2012, November 2013, and July 2014 notes to PSB Credit Services Inc. By December 2016 Johnson Creek Enterprises was in default of its payment obligations under the notes. PSB Credit Services entered into a forbearance agreement with Johnson Creek Enterprises and the guarantors, including the debtor. As a result, among other things, the balances due under the notes were consolidated with the accrued interest thereon, which was capitalized, and late charges, for a total "Restructured Balance" of about $889 thousand; PSB Credit Services agreed to forbear until December 9, 2018, subject to certain conditions precedent, including an initial payment of $105 thousand by December 16, 2016, and weekly payments commencing the following week; and the guarantors agreed that the forbearance agreement did not affect the May 2012 guaranty. ECF No. 108-2, at 35–42.

In May 2017 the debtor moved from real property he owned at 101 Mark Drive in Johnson Creek, Wisconsin, to 5868 North 35th Street in Milwaukee, Wisconsin. The debtor had purchased the 35th Street property less than a year earlier, at auction, through a single-member LLC of his called Byway Investment, planning "to fix and flip the property and sell it or rent it out", though he never did either. ECF No. 123, at 53:35–54:15 & 56:30–:50. The debtor sold the Mark Drive property that November. Johnson Creek Enterprises went out of business that year.

In November 2018 PSB Credit Services sold its interests under and related to the notes it had acquired from JPMorgan Chase and the December 2016 forbearance agreement to CL Ventures LLC, which immediately sold them to WiscTex. In January 2019, after successfully credit-bidding $100 thousand at a forced sale of collateral securing the debt, WiscTex sued the debtor and Therrons Dad in the Wisconsin Circuit Court for Milwaukee County, seeking a judgment against them for the remaining restructured balance due under the forbearance agreement, based on their May 2012 guaranty of Johnson Creek Enterprises's debts to JPMorgan Chase.

In May 2019, the debtor executed a quit-claim deed for Byway Investment, transferring the 35th Street property to himself for a nominal payment of $1. He earlier intended to transfer the property to himself from Byway after it became his home, but around May 2019 he first learned about a real property tax credit available to disabled veterans under state law, which provided sufficient motivation to transfer title.

In August 2019 WiscTex moved for summary judgment.

In September 2019 the debtor first met with Hanson & Payne LLC, his counsel in this case, about the possibility of seeking relief under the Bankruptcy Code. (Though he had met with another bankruptcy firm, ESSERLAW LLC, in April 2018, he declined to retain their services, concluding that it was not necessary at the time.)

In December 2019 the debtor received an offer from Lakeland Property Management LLC to purchase real property located at 313 South Marshall Avenue in Jefferson, Wisconsin. The debtor bought the property as an investment in October 2013 and rented it to his sister, Belinda, who was still living there in 2019. Belinda and her husband, Bruce, who are both real estate agents, assisted the debtor with the sale of the property to Lakeland. The debtor agreed to sell the property "as is" for $135 thousand, subject to its appraising for $170 thousand or more, because, he testified, the property needed substantial and expensive repairs, including a new roof and a new heating and air conditioning system, and he avoided having to pay a broker's commission by enlisting Belinda and Bruce to act on his behalf. The sale closed in January 2020. The debtor was unable to attend the closing, so he granted Belinda a power of attorney specific to the transaction, authorizing her to sign the necessary documents on his behalf. Belinda still rents the Marshall Avenue property, and, as the debtor later learned, she secured from Lakeland an option to purchase the property.

Around that time, the debtor and the attorney representing him in state court started planning to negotiate with WiscTex about settling its lawsuit against him. The debtor began freeing up assets for that purpose and preparing a statement of his financial condition. He testified that, in doing this, he realized that he had saved less for his retirement than he thought he would need, especially given then-recent medical issues that had caused him to consider more seriously the need to shore up his savings. When WiscTex snubbed his initial settlement offer, the debtor decided to take the funds he had gathered and buy an annuity.

In January 2020 the debtor contacted a financial advisory, George Schmidley, to discuss annuity options. When the two met in person in early February, the debtor gave Schmidley a check for $100 thousand that Schmidley used to purchase an annuity for the debtor from Nationwide. Most of the funds, about $66 thousand, were the debtor's net proceeds from the sale of the Marshall Avenue property. The remainder consisted of more than $5 thousand the debtor withdrew from a brokerage account, more than $16 thousand he transferred to himself from Byway Investment, and a portion of more than $18 thousand he had placed with a service called Lending Club.

In May 2020 the state court granted WiscTex's motion for summary judgment and entered a judgment for about $686 thousand against the debtor and Therrons Dad. In August 2020 the debtor commenced this case under chapter 7 of the Bankruptcy Code. He claimed as exempt under applicable state law, i.e., Wisconsin law, the 35th Street property, a 2014 Dodge Ram, his brokerage account, his interest in Byway Investment up to $15 thousand in value, his Roth IRA, a checking account with JPMorgan Chase, his Nationwide annuity, and other personal property. He claimed as exempt under federal nonbankruptcy law a second checking account with JPMorgan Chase purportedly containing only veterans’ and Social Security disability benefits payments, some medical equipment, and his Nationwide annuity. WiscTex and the trustee timely objected to the debtor's claim of exemptions.

In May 2021 the court held an evidentiary hearing by Zoom videoconference. The objecting parties called Schmidley and the debtor to testify. The debtor also testified in his own case and presented the expert testimony of an attorney with expertise in employee benefits and requirements for IRAs under the Internal Revenue Code. The parties then briefed the issues, and the court took the matter under advisement.

II

WiscTex and the trustee principally seek denial of some or all of the debtor's state-law exemptions under Wisconsin Statutes section 815.18(10), which provides in relevant part, "Any or all of the exemptions granted by this section may be denied if, in the discretion of the court having jurisdiction, the debtor procured, concealed or transferred assets with the intention of defrauding creditors."² WiscTex and the trustee primarily focus on the debtor's actions during WiscTex's state-court suit against him, arguing that he caused Byway Investment to convey the 35th Street property and liquidated assets that he would not have been able to exempt to purchase an exemptible annuity. They contend that in so doing the debtor "procured ... or...